Saudi shoppers hit by tripling of VAT rate

Late last month, Basma al-Jahdali and her friends hit the shops in Saudi Arabia, eager to buy as much as they could, driven not by fear of coronavirus-related shortages, but by the imminent tripling of the country’s value added tax.

“I bought a laptop and many of my friends bought cars,” said Ms Jahdali, a barista at Perks Coffeehouse in the port city of Jeddah. She had previously worked in healthcare but switched careers and hoped to become a partner in the coffee shop. “I also bought cat food: I have 15 cats and feeding them cost around SR3,000 ($800) per month so it made sense to stock up.”

As Saudi Arabia has grappled with the twin shock of low oil prices and the coronavirus pandemic, the government has cut spending, suspended the cost-of-living allowance for state employees and this month increased VAT from 5 per cent to 15 per cent.

Two years ago, Saudi Arabia and the UAE became the first two countries in the Gulf to introduce VAT. Riyadh’s decision to triple it reflects how the social contract between Saudi citizens and the government is changing as Crown Prince Mohammed bin Salman pushes his vision for economic and social reform.

While older generations have enjoyed cradle-to-grave benefits and easy access to public sector jobs with almost no taxes, younger Saudis are expected to create their own jobs and work longer hours for lower pay in the private sector.

“The message seems to be that now is a moment for tough fiscal discipline that will benefit the country in the long-term, and that may be true,” said Karen Young, a resident scholar at the American Enterprise Institute in Washington who focuses on Gulf economies. 

“However, recovery will be slow, unemployment will become more entrenched, and an uptick will be dependent on oil price increases and global demand picking up next year,” she added.

Authorities have announced a stimulus package worth $32bn to help businesses and workers cope with the economic crisis, but the IMF expects the kingdom’s economy to have contracted 6.8 per cent by the end of year, a sharper decline than the 2.3 per cent estimated in April. Most coronavirus-related restrictions were lifted last month and Saudi officials said they are “less pessimistic” than the IMF.

“In the last two weeks after reopening, we have seen a giant leap [ in economic activity], even way more than it was before the pandemic,” central bank governor Ahmed al-Kholifey told a virtual conference last month.

The government has already announced a 5 per cent or $13.3bn cut in budget spending and more reductions are expected. Analysts at Al Rajhi Capital estimate the increase in VAT revenue to generate around SR28bn this year. “If the VAT stays at 15 per cent for 2021, we expect additional revenue from it to be SR88bn,” they said in a research note.

Pro-government pundits in local media have defended the VAT increase as an “economic necessity”, even as businessmen wanted the government to reconsider or postpone it to encourage people to spend more as economic activity resumed after months of lockdowns and strict curfews.

“Supermarkets, pharmacies and logistics companies will continue to benefit as they did when everything else was shut down,” said Abdullah al-Othman, founder of digital payments company Geidea. “Other businesses like F&B (food and beverages) and fashion will take longer [to recover].”

“Our business has slowed down but didn’t get damaged. We didn’t have to make any cuts but growth has not been what we were hoping for,” he said. “We have around 1,000 employees. We didn’t fire anyone.”

Sectors hit particularly hard by the virus include those that the government had pegged for future growth, such as tourism, entertainment and culture.

Waleed Baashen, a 62-year-old actor, has not worked since March. Even as businesses reopened, his acting gigs have been slow to pick up and he spends most of his time these days reading scripts. “I’m from a vulnerable age group and I fear for my health,” he said. 

The median salary for Saudi citizens is around SR10,000 a month and already, the VAT increase is making itself felt. As a result, real estate sales have melted by 85 per cent in a matter of days — from SR10.9bn in the last week of June to SR1.7bn a week later when the tax came into effect, according to a real estate index run by local business daily al-Eqtisadiah.

For now, people in Saudi Arabia are getting used to higher prices. “Business has slightly slowed down after the tax because people have started to monitor their spending more carefully,” said Ms Jahdali, the barista. “More of our customers now ask if we have a loyalty card and they make sure to use it to get a free cup of coffee.”